Thermon Group Holdings, Inc.
Q4 2013 Earnings Call Transcript

Published: 5 Jun 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Thermon Earnings Conference Call Q4 2013. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms. Sarah Alexander, Director, Investor Relations. Please go ahead.

[Sarah Alexander:]

Thank you, Ally. Good morning, and thank you for joining us for today's earnings conference call. We issued an earnings press release this morning, which has been filed with the SEC on Form 8-K, and is also available on the Investor Relations section of our website at www.thermon.com. A replay of today's call will be available on our website beginning 2 hours after the conclusion of this call. This broadcast is the property of Thermon. Any redistribution, retransmission or rebroadcast in any form without the express written consent of the company is prohibited. During this call, our comments may include forward-looking statements. These forward-looking statements are subject to risks and uncertainties, and our actual results may differ materially from the views expressed today. Some of these risks have been set forth in the press release and in our annual report on Form 10-K that will be filed with the SEC in the next several days. We also would like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may include, among others, our outlook for future performance and revenue growth, leverage ratios, acquisitions and various other aspects of our business. During the call, we will also discuss some items that do not conform to Generally Accepted Accounting Principles, including adjusted EPS and adjusted EBITDA. We have reconciled those items to the most comparable GAAP measures in the tables in the earnings release. Adjusted EBITDA and adjusted EPS should be considered in addition to, and not a substitute for, income from operations, net income, net income per share and other measures of financial performance reported in accordance with GAAP. And now, it's my pleasure to turn the call over to Rodney Bingham, our President and Chief Executive Officer.

[Rodney Lynn Bingham:]

Thank you, Sarah. Good morning, everyone. Thank you for joining our conference call and your continued interest in Thermon. Today, we have 2 of our Senior Vice Presidents joining me on this earnings call. Jay Peterson, our CFO, will follow me and present the financial details of our fiscal year 2013 fourth quarter and year-end; George Alexander, our Executive Vice President of Global Sales, will assist in the Q&A session by answering questions that pertain to global market segments and/or industry trends. For those of you who are not familiar with Thermon, we are a leading global provider of thermal solutions. We serve the oil, gas, chemical and power generation industries. Our heat tracing system provide freeze protection and temperature control for piping, vessels and instrumentation. These mission-critical systems ensure the continuous and safe operation of industrial facilities. While Jay will discuss our financial details in a moment, I would like to touch on a few highlights. Our fiscal year 2013 revenue of $284 million was the highest in our history. This includes an FX negative impact on our fiscal year revenue of slightly over $7 million. With a constant currency scenario, our growth would have been 7%. Jay will also address record-breaking GAAP EPS and free cash flow achievements later on. Our operations, engineering and construction personnel did an outstanding job of processing this record level of business that had never before been achieved by Thermon. We are extremely proud of their dedication and commitment. Our revenue mix for the fourth quarter was 43% Greenfield, 57% MRO/UE. The fiscal year split was 42% Greenfield, 58% MRO. This was slightly higher than our historical Greenfield average of 40%. Gross margins for the quarter were 45% of sales. While these margins were slightly lower than our previous quarters, they are consistent with our historical average of approximately 45% of sales. This reduction was due to product and project mix. Basically it was a good quarter for Greenfield revenues as we closed out several jobs. Backlog, as of March 31 was $95.2 million. This was down slightly as we had that increase in Greenfield billings we just spoke of, as well as some softness in new orders. We have completed our new control panel and skid fabrication facilities in our San Marcos plant. We also completed a move to our new office in Houston, Texas. This more than doubled our engineering workspace and panel shop footprint. These 2 infrastructure build-outs put us in excellent position to accommodate future growth and increase our operational efficiencies. Our global footprint continues to penetrate our targeted end markets of oil, gas, chemical and power, and the result is still projecting a long-term organic growth in these areas. We are excited about our record-breaking year. We have grown our business despite unfavorable foreign currency headwinds and soft markets in the U.S. and Europe. Fiscal year 2014 is forecasted as another record-breaking year for Thermon revenue, as we see continued growth potential in all 4 of our major geographic areas. Our guidance for FY 2014 is mid-single digit growth rate. Historically, Q1 is our lowest revenue quarter, as it immediately follows the winter heating season. That will likely be the case in 2014. Our plan is to build momentum throughout the fiscal year so that we reach our projected growth rate. We are beginning to see increased activity in the United States, related to the shale, oil and gas development. This also includes downstream petrochemical projects along the Gulf Coast. The Canadian oil sands continue to be strong, even in the face of a slowdown in capital spending. Thermon's pipeline is still robust, and we are anticipating increased MRO revenue in 2014, due to the larger installed base. Emerging markets in Latin America, Europe and Asia-Pacific continue to see growth in mining, oil, gas and power. Our management team would like to thank our employees throughout our global organization for their hard work and dedication. We would also like to thank our customers, investors and advisors for their support and confidence. Thank you, again, for joining us today. Jay Peterson, our CFO, will now address the details of our financial performance for Q4 and year-end fiscal year 2013.

[Jay C. Peterson:]

Thank you, Rodney. Good morning. I would like to start off by discussing our fiscal year results, followed by Q4 results and then conclude with several guidance points for fiscal year 2014. First off, let's start with revenue. Our top line revenue grew 4% in fiscal year '13, to a total of $284 million. Our highest growth areas were Asia-Pac and Canada, both with double-digit growth. Our revenue was negatively impacted from foreign currency translation by approximately $7 million this past year. In pro forma, excluding the FS impact, our top line growth would amount to 7%. And major currencies impacting our revenues this year were the euro and the Canadian dollar. In terms of gross margins, for the past year, they were 46.8%, versus prior year of 48.5%, and that's a decrease of 170 basis points. And margins were negatively impacted by a strong Greenfield mix, and that mix increased from 39% in the prior year to 42% in this current year; and as previously discussed, 2 strategic projects. In terms of operating expense, expenses for the fiscal year declined from $65.5 million to $62 million, and that excludes management fees in fiscal year '12 and depreciation. And as a percent of revenue, that was 22%. Earnings for the year, from a GAAP EPS perspective, increased from $0.40 a share to $0.85 a share. And note that our GAAP earnings were negatively impacted by approximately $0.02 a share from the combined effects of foreign exchange, when considering both translation and transaction impacts. And our adjusted EPS grew from $0.85 a share to $0.91 a share this past year. And please refer to the table in our earnings press release for the details on these adjustments. We also grew free cash flow to $1.10 a share from our prior year use of cash of $0.19 a share. And in aggregate, we generated $35 million in free cash flow, and that's defined as cash flow from operations, less capital investment. And that's versus a use of cash of approximately $6 million in the prior year. EBITDA totaled $72.4 million this past year or 25% of revenue. Let's turn to the balance sheet. Our cash balance at the end of March was $43.8 million, compared to $21.5 million in the prior-year period, and that's an increase of 104%. Our net debt position and leverage continues to decrease. One year ago, March, our net debt was $117.7 million. And at the end of March, there was $74 million or a 37% reduction. And regarding our net debt leverage, as we ended '13, our debt-to-EBITDA leverage was 1x EBITDA, versus almost 1.7x in the prior year. And for our Manufacturing business, we continue to run a highly capital-efficient operation. For the fiscal year, our CapEx spending totaled $6.3 million, and that includes both maintenance and growth capital or 2.2% of revenues. And lastly, year-on-year, our stockholders' equity increased by 17%. Let's now focus on Q4. Revenue for the past quarter grew to a Q4 record of $71.7 million, an increase of 3% over the prior year's quarter. Orders for the quarter totaled $59 million, and our trailing 12-month order activity totaled $260 million. Our backlog of orders ended March at $95.2 million, versus $117 million at the end of Q4 fiscal year '12. That's a decrease of 19%, and the primary reason for that decline year-on-year was due to the execution of Greenfield orders in our backlog. Margins for the quarter were $31.9 million, and on a relative basis, our margins declined to 44.5%. And again, that's due to the high mix of Greenfield revenues. Our MRO/UE mix for Q4 was 57% of revenues this quarter, whereas Greenfield totaled 43%. In terms of OpEx and headcount, our core operating expenses for the quarter, and that is SG&A, and that excludes depreciation and amortization, totaled $16.5 million, an increase of $400,000 from the prior year. Our operating expense as a percent of revenue this past quarter was a competitive 23%. And again, that excludes D&A. The number of full-time employees at the end of March was 821, and that's up from 755 as of calendar 2012. And over 91% of these additions were in production, sales, R&D and engineering, and all directly relate to managing our top line growth. GAAP net income for the quarter totaled $5.6 million, compared to a prior-year of $6.3 million. And this decline, again, was attributable to our strong mix of Greenfield revenues impacting our Q4 margins. Our EBITDA totaled $15.7 million this past quarter, and that's down from the prior year's performance of $18.1 million. And EBITDA, as a percent of revenue, was 22% this past quarter. Let's now turn to guidance. Several guidance points we'd like to offer. First off, we are planning for top line revenue growth in the mid-single digits for fiscal year '14. Next point, we will see a significant decrease in our interest expense. And due to our recent financing, we will share -- save somewhere around $7.5 million or $0.23 a share on a pretax basis. And the last point, as a result of our lower debt service requirements in the United States, associated with this recent refinancing, we expect to adopt a permanent foreign investment policy with regard to our foreign subsidiary earnings. And in future periods, we will no longer expect to accrue the estimated incremental tax on the earnings of our subsidiaries -- foreign subsidiaries. And accordingly, we expect that our effective tax rate will decrease from 35% this past year, to the low 30% range in fiscal year '14. And this reduced tax rate will save the company, and this is based on fiscal year '13 earnings, approximately $2 million a year in income taxes or $0.06 a share. I would now like to turn the call back over to Ally to moderate our Q&A session. Ally?

[Operator:]

[Operator Instructions] Our first question comes from Brian Drab of William Blair.

[Brian Drab:]

The first question is just around the guidance for revenue growth. And Rodney, I think that you indicated in your comments that growth might start off a little slow, and then improve as we move through the year. Did I interpret that correctly?

[Rodney Lynn Bingham:]

Yes, you did.

[Brian Drab:]

Okay. And so, in the oil sand -- regarding your comment on the oil sands, you said that even though capital expenditures there is -- has come off a bit, you expect to see strength in the oil sands. Can you kind of reconcile that for us?

[Rodney Lynn Bingham:]

Yes. Let me let George deal with that question.

[George P. Alexander:]

Yes, Brian, Canada, as we mentioned in the call, had a very strong year in fiscal year '13. And the projections going into '14 continue to be strong. This is largely as a result of the project base there that is around the SAGD or in situ projects. There has been some slowdown in some of the capital spends there. But fortunately for us, the customers' base that we're strongly positioned with are still projecting a strong environment for capital spending. And then also, as we mentioned in the call, the MRO activity in our Canadian operation appears to be very strong in terms of a growth because of the significantly larger installed base there.

[Rodney Lynn Bingham:]

Brian, let me just add one thing to George's comments about Canada. There's been a lot of press about one of the major upgraders being canceled, which it was, which does not have any effect on, on our numbers either before or going forward. But something has not publicized as much is they're still continuing, like Suncor's still continuing to go with projects like partial upgraders, like the Fort Hills upgrader, where they're partially upgrading the bitumen and still getting it in the pipeline with obviously lower cost up in the Fort McMurray area for extraction. So I just wanted to add that part to what George had to say.

[Brian Drab:]

Okay, great. And is there a particular reason why you win the business on those projects that seem to be continuing, and maybe the smaller scale upgraders, versus the larger scale? Or is it just the partners that you're working with?

[Rodney Lynn Bingham:]

Well, we'd like to believe it's because our value package that we offer is getting the attention of the customer, and we're maintaining a loyalty base there. But it is true that you have to be in the right place at the right time, and we feel like we are.

[Brian Drab:]

Okay. So in Canada, is it safe to assume that you're expecting your revenue to be up in fiscal 2014 versus your revenue in Canada in fiscal 2013?

[Rodney Lynn Bingham:]

That's correct.

[Brian Drab:]

Okay. And can you -- maybe this question for Jay, can you tell me what the order growth or decline was? I'm not sure if I have that growth rate yet, in the fourth quarter.

[Jay C. Peterson:]

In the fourth quarter? Yes, I do have what the orders were. I'm not certain I have the comparative to the prior year right at my fingertips.

[Brian Drab:]

If I have the $59 million, right, for the quarter? I'm not sure if I...

[Jay C. Peterson:]

Yes. $59 million is correct. Relative to the prior year, it was $84 million. And obviously, those are some very lumpy numbers, based on when we get a large Greenfield project or when we don't.

[Brian Drab:]

Okay, okay. And that's what we would expect to recover in the back half of this fiscal -- coming fiscal year.

[Jay C. Peterson:]

Yes.

[Brian Drab:]

Okay. And can you give us any sense -- just this is the last question -- but expectation for a split between Greenfield and MRO in 2014?

[Jay C. Peterson:]

We're planning 60-40, MRO to Greenfield.

[Operator:]

Our next question comes from Brett Linzey of KeyBanc Capital Markets.

[Brett L. Linzey:]

Just given where the current leverage of the balance sheet is and your recent debt refi, I guess, what's your expectation in terms of returning cash back to shareholders? Free cash flow, still strong here, between dividends and share buybacks?

[Jay C. Peterson:]

Yes. Good, good point. First off, though, we believe this continues to be a growth business. And we're going to have, hopefully, another record year in fiscal year '14. So our primary use of cash will be to reinvest back into our operations. We also have talked about M&A in the past. And we have a defined process, where we're looking for prudent acquisitions to inorganically grow our business. We will also continue to pay down bank debt. And do we have the wherewithal to pay a dividend or possibly a share repurchase program? We do. But really, those 3 focus areas that I mentioned are going to be the primary use of our cash going forward.

[Brett L. Linzey:]

I mean, I guess, given the capital intensity of the business, it seems like the needs there maybe are a little bit smaller. Are there specific investments that you're going to be planning for in fiscal '14?

[Rodney Lynn Bingham:]

From a CapEx perspective, we were planning on 1% for maintenance capital, and also 1% of revenues for expansion capital. However, there are some growth areas that we look to handle -- to add sales talent and engineering talent, international growth areas.

[George P. Alexander:]

Yes, we have both the geographic growth potential in the emerging markets that we're going to be continuing to invest in, relative to our business. And we also have some product areas that we're looking to grow -- continue to grow that we're going to be looking at the possibility of capacity expansions.

[Brett L. Linzey:]

Okay, that's helpful. And then in terms of SG&A, maybe a little bit higher than we'd expected. Was there anything transitory or true-up in nature in the quarter that distorted that number? And I guess, how should we think about SG&A as a percent of sales in the fiscal '14?

[Jay C. Peterson:]

Yes. We, as I mentioned, we have hired a fair number of people to execute the business that we're going to generate next year. From a planning perspective, I would utilize what we call our timeless business model, and that is gross margins at 45% of revenues, SG&A at 20%, and that excludes depreciation and amortization. And then on a bottom line EBITDA basis, that would be a return of 25% of revenues on an EBITDA basis, exactly what we performed this last year.

[Brett L. Linzey:]

Okay. So you think the hiring is adequate within the 4Q period and that should normalize into '14?

[Rodney Lynn Bingham:]

Yes, we do. We do have a kind of a laser focus on certain skills we're going to hire in fiscal year '14, but it would be to -- based on our plans, it'd be a much smaller number than what we hired in fiscal year '13.

[Operator:]

Our next question comes from Scott Graham of Jefferies.

[R. Scott Graham:]

So MRO was down all year, and I'm just wondering if you guys can comment on that.

[George P. Alexander:]

Scott, that's something that is a very important part of our business, as you know. It was down primarily in the U.S. and in Europe, were the 2 areas where it was down. We didn't have a particularly hard winter in the U.S., again in the areas -- especially in the areas where the facilities are outdoors. And so, I can't give you a precise answer on that, other than the geographies of -- the geographies, excuse me, where it was down. But we don't anticipate that to continue as we said before. We already are seeing the general activity in the U.S. is trending upwards. So we're bullish on that.

[R. Scott Graham:]

Okay, great. The sales being up in your 4 regions, and I guess, I'm particularly interested in outside of Canada, because that question was already answered. You're getting that, your sales optimism of up all 4 regions is coming from your customers, yes?

[George P. Alexander:]

Yes, that's correct. In the U.S., as Rodney mentioned in his presentation, it's -- much of it is tied to activity that's in the shale oil and gas arena, both in terms of the upstream and the downstream sector. The other area in the U.S. that's very active is in power combined cycle, which is also related to cheap gas. The uptick in activity in Asia is -- continues to be linked to capital spending that's going on in the emerging markets, and that also includes the Middle East. And I would just maybe remark, again, to consider the fact that we track our business based on where the purchase order is placed. So in Asia-Pacific, many -- much of the capital projects that -- Greenfield projects that were -- that we win that may come from an EPC that is located in Asia-Pacific, but if the project's destined for the Middle East, as an example, or the LNG market, that's also very significant in terms of its activity at this point.

[R. Scott Graham:]

Okay, that helps. If -- I don't remember, Jay, what the 4Q last year, orders were up or down versus the year before. The $84 million, it doesn't -- seems like a fairly high number. Do you know what the comparable was for 2011 on that $84 million in the orders?

[Jay C. Peterson:]

Yes, I can give you, if you just bear with me just a second. Scott, I'm going to have to -- I'll send you an e-mail, off-line on that. If my memory serves, we had a very, very strong year in Q4 orders. So I think you have a difficult comp period that we were wrestling against.

[R. Scott Graham:]

Okay. I'll look forward to that e-mail. And I know that this is kind of asking the same question, different slice, George and Rodney. But the fact that your backlog has kind of successively come down all 4 quarters of this year, with the biggest drop in the fourth quarter, this, obviously, being attributable to the weakness in the orders, are you seeing your order book build now, even though you're expecting second half better than the first half of fiscal '14, is that book building now on the OE side, the Greenfield side?

[George P. Alexander:]

This is George. Yes, we're seeing some positive movement there.

[R. Scott Graham:]

Okay. Now, last question is, you guys have a much larger sales capacity in front of you. One of the things that this was going to do was enable you to bid on projects that you were not able to bid on before, and I'm just kind of wondering how that is going, what is the market with your customers? What are they saying about your capabilities now, and is that rewarding you in new business?

[Rodney Lynn Bingham:]

Okay. That's kind of a 2-part answer, Scott. This is Rodney. The business that we -- the capacity expansion gave us the opportunity to latch onto a couple years ago with some private label groups in adjacent markets like the commercial marketplace, we're still participating in that business at this point. However, we also added a lot of operational efficiencies. Jay may have the exact numbers, but our inventory level is down significantly as a result of our increased capacity. Also too, we have finished and went through a winter heating season where we virtually had 0 disruptions in terms of material flow into our sales channels. We had an excellent year, and we were able to hit on-time deliveries at higher percentage than we had over the last several years. So we've decreased inventory, increased the order shipment rates and frequency, as well as still being able to maintain the adjacent market push of commercial. And we're going to continue to do that because we have the capacity to build that market channel as we go forward.

[R. Scott Graham:]

That's -- I appreciate that, Rodney. I guess what I was trying to get to is there are a number of what the EPCs are calling mega projects that are coming down the pipe. And I was just wondering with these projects expected to be green-lighted over the next 12 months, would you expect that capacity expansion to enable you to more effectively bid on that business?

[Rodney Lynn Bingham:]

Yes, absolutely.

[R. Scott Graham:]

Are there things that you're seeing right now that fortify that answer?

[Rodney Lynn Bingham:]

George?

[George P. Alexander:]

The things we're seeing right now, as I said before, we're seeing an uptick in terms of Greenfield activity, both from the near-term perspective, which is the quoting and so forth. But also basically in working with our customers in the longer term, if you will, longer-term, meaning the 12 to 24 months out. So yes, as you know, Scott, we would have had a difficult time growing our business at all, if we didn't have this additional capacity. So this additional capacity does enable us to, one, aggressively pursue these projects; and, secondly, it also enables us to support a growing MRO market.

[Operator:]

Our next question comes from Martin Malloy of Johnson Rice.

[Martin W. Malloy:]

In terms of Canada, can you talk about is there any difference for you in SAGD versus mining projects, whether it'd be on a MRO/UE side or the Greenfield side for sales?

[George P. Alexander:]

In terms of the volume, you mean, or the potential?

[Rodney Lynn Bingham:]

Yes. As we see more and more SAGD and less mining go forward. Is that positive or negative for you?

[George P. Alexander:]

On an individual project basis, the in situ or SAGD process is smaller than one associated with a full upgrader. But again the number of projects is what's encouraging about the number of well pads, the number of well sites is significant. And the projections are that the development of those resources is going forward, those are funded, and many of them are underway. And so in total, we're seeing an opportunity for growth there. But, yes, if you look at it on an individual project basis, the spend is less on the SAGD.

[Martin W. Malloy:]

Okay. All right, and then after -- on the backlog side after 4 quarters of sequential decline, do you think that we'll to start to see in the first quarter of fiscal '14 that backlog will be higher at the end of the quarter?

[Jay C. Peterson:]

Yes. We believe so, based on some of the activity that we've seen over the last 60 days.

[Martin W. Malloy:]

Okay. And then you mentioned in terms of uses of cash possibly moving into some adjacent areas, can you -- is there any help you can give us in terms of what those adjacent areas might be?

[George P. Alexander:]

I think, Jay covered that. Where we are focused on growing our business, where the opportunity is, and that's much of that opportunity is international. It's in areas where we are going to continue to invest in our organization, albeit at a lower rate in '14 than last year. So first and foremost, we're going to continue to use the cash that we generate to grow our business and organically. And then, as has been the case, we're still very much part of our strategy to take advantage of any acquisition opportunities that are prudent and make sense based on our growth strategy.

[Operator:]

Our next question comes from Charlie Brady of BMO Capital.

[Charles D. Brady:]

I also want to clarify something on the gross margin. You're forecasting a better mix of MRO in fiscal '14, but you're forecasting a gross margin of 45%, which would be a year-over-year decline. So I guess, I'm just trying to square those 2 figures.

[Jay C. Peterson:]

Yes, we -- our timeless business model is 45%. That's obviously predicated on mix. We will do our best to beat that. However, from a modeling perspective, we would -- we're giving out that conservative guidance as 45%, is there upward exposure to that number? Yes. Yes, we believe so. But from a conservative perspective, the 45% number is what we believe would be prudent.

[Charles D. Brady:]

Okay. And just with respect to then, to the fourth quarter of '13 gross margin of 44.5% -- on the Q3 call, you guys have guided to, I think the language was similar to -- the fourth quarter should be similar to third quarter, which would've implied a 45.5% gross margin. And you were about halfway through the quarter roughly at that point in time. I'm just trying to understand, given that a lot of the business is OE, is it a function of some of the aftermarket business didn't materialize or slipped out of Q4 that you were anticipating would hit in Q4? Or is there something else with the mix of OE -- the margin within OE lower than expected?

[Jay C. Peterson:]

Yes, that's a good question, Charlie. Our Greenfield can vary in gross margins. Some of these projects are in the 20% range, some are in the 30% range or higher. And there's a fair amount of variability, all predicated on the level of third-party buyout items. And that's oftentimes the dynamic that we're wrestling with when we try to plan or forecast.

[Charles D. Brady:]

Okay. That's helpful. I wanted to go back to the prior comment you made about the backlog, on the back of Marty's question. Did I hear you correctly that you expect backlog at the end of Q1 '14 to be higher than end of fiscal year '13?

[Rodney Lynn Bingham:]

Yes, yes we do. Knock on wood.

[Charles D. Brady:]

Because that would imply a pretty significant order intake in Q1, and you just commented that you had some soft orders in Q4. Is there some slippage into Q1 that would make that a pretty strong order quarter?

[Rodney Lynn Bingham:]

No. We just think the general demand and the general consensus we're hearing from our affiliates.

[George P. Alexander:]

And other thing is, again, that in terms of the backlog value, that's primarily Greenfield activity. And so again, we are seeing an uptick, and we're optimistic about our position on those Greenfield projects.

[Charles D. Brady:]

Okay. Well, that's good to hear. One more, and I'll get back in the queue. With regard to the debt -- the change in the debt structure, are there any charges or expenses being taken in fiscal Q1 related to that?

[Jay C. Peterson:]

Yes, yes, there will be, Charlie, we're working with our auditors at present. And also, we have not gotten a lot of the exact bills in from our legal team who worked on that. But there will be a one-time charge relating to that activity. One favorable piece from an EPS perspective, however, is that the debt issuance costs for the refinancing will be substantially lower, compared to what we were previously amortizing from the bond issuance costs. I don't have an exact number, but my gut tells me it'll be about 50% lower going forward than what we were amortizing in the past.

[Operator:]

Our next question comes from Rich Wesolowski of Sidoti.

[Richard Wesolowski:]

The activity around domestic refining in gas and liquids and heavy process, in general, has been bustling for a year or 2 now. And I heard your bullish outlook for the future, but I would've guessed that there would have already been plenty of tracing work to do, and I'm wondering what has muffled that translation or maybe the timing of that work so far.

[George P. Alexander:]

The timing of it -- of pre-tracing activity is towards the end of the development of the field -- the shale gas field or the shale oil activity. We have seen some uptick in the areas that have been going on for the past year. Again, it also needs to be, or it's advantageous for us for the activity to be in a cold climate, so some of the activity in Texas is not nearly as valuable as the activity in a cold environment.

[Richard Wesolowski:]

Right. Does the lull in sales growth from the pace that you were on in '11 and '12 prompt you to revisit your multi-year sales target of $400 million to $500 million?

[Jay C. Peterson:]

No, we don't believe so.

[Richard Wesolowski:]

Okay. I would assume then that there's going to be a reacceleration somewhere out there in -- beyond fiscal '14?

[Jay C. Peterson:]

Yes. That is our current thought.

[Richard Wesolowski:]

Are there any regions that you would guess at this point, of course, you're looking pretty far out, but that would drive that?

[George P. Alexander:]

Middle East.

[Jay C. Peterson:]

I'm sorry. The Middle East, we've made some significant investments in the Middle East over the last 12 to 18 months. Also, we're seeing a rebound, as George mentioned earlier, in the U.S. And we believe certain pockets in Europe will perform better over the next several years, than they have, over the last year or 2.

[George P. Alexander:]

Yes, the other significant area is the -- of growth is -- in activity is the LNG market. And again, that manifests itself in the EPC centers around the world, as opposed to at the site location. But that's also a very robust area that we see a lot of growth in going forward.

[Richard Wesolowski:]

Okay. And then lastly, you had a higher share of the Greenfield activity in fiscal '13, but I thought there was an open question as to whether there was a favorable margin offset from your higher throughput in your expanded plant. Did you see that in '13, and if not, would you expect to in 2014?

[Jay C. Peterson:]

No, nothing of any major significance. And for one reason, the incremental depreciation was rather modest with that investment. It was about $75,000 per quarter. And also, it's a rather labor unintensive business. Labor's such a small component of our manufacturing process that there's -- there are efficiencies but we're not talking about 200 or 300 basis points. It's much minor -- much more minor than that.

[Operator:]

[Operator Instructions] Our next question comes from Glenn Primack of PEAK6.

[Glenn Primack:]

What do you think your present market share is today? And then, how much share between you and [indiscernible], or what do they call them? Tyco, Pentair have these days in the heat tracer market?

[Rodney Lynn Bingham:]

On a global basis and focusing on a design supply or materials-only basis, we believe that our market share is somewhere in the neighborhood of 20% versus -- 20% to 25% on a global basis. And again, it varies from region to region. The 2 main players are, obviously, us and Pentair. We do have regional competition that as noted in our presentation that's generally not global, but concentrated in a particular area.

[Glenn Primack:]

Okay. And in terms of the additional people, are you finding people potentially from there, since there's been, I guess, some change with the ownership and -- or are you -- where are you finding your new sales and operations people that you're bringing in to grow the International business?

[Rodney Lynn Bingham:]

We are finding them from non-competitors. We're finding in all areas that we're going into new geographies, as well as established geographies and areas that we feel are still growing; parts of Europe, Canada and so on. But in terms of the other guys, what -- that's not been a source of recruitment for us.

[Glenn Primack:]

Okay. And then in the new product areas, would you get into -- are there any connector-type opportunities on your cable? Or is it pretty much you're just using your R&D innovation in making, maybe new cabling?

[Rodney Lynn Bingham:]

Well, a major component of our value proposition besides parts is the engineering design side. That's extremely important in terms of being able to service the major customers' expectations, the Shells, the Exxon, the Chevrons of the world expect full engineering services, a complete line of products and a global footprint. So it's a holistic type of solution that really separates the tiers of the heat tracing world.

[Glenn Primack:]

Okay. So then your investment that you're making in people and support that – you're just pretty much following your customers around the world and making sure that you have the people to satisfy the potential demand yet to come?

[Jay C. Peterson:]

That's correct.

[Glenn Primack:]

Fair to say?

[Rodney Lynn Bingham:]

Yes, it's a combination of local assets on the ground, as well as developing and providing corporate support on major multinational projects. So it's a combination of both of those sort of strategies, in terms of building up employees.

[Rodney Lynn Bingham:]

Keep in mind that again, our focus is both on the end-user in our business as well as the EPCs. And while many of them -- many of the end-users are U.S. or Canadian or Western European, there's also a significant number of players in the emerging markets that we're also very much focused on in working with.

[Glenn Primack:]

I'm guessing it's the end customers as you spec-ed in there the EPC is not going to really mess around too much in terms of the potentially changing out for some other piece of cable.

[George P. Alexander:]

That would be a safe assumption, yes.

[Glenn Primack:]

Okay. And then on the gross margin side, are you expecting to see any benefit at all in terms of your raw material costs?

[Jay C. Peterson:]

We don't have...

[Glenn Primack:]

Or are you just holding anything flat?

[Jay C. Peterson:]

We're planning for those to be flat this coming year.

[Glenn Primack:]

Okay. All right, so you have $0.06 from tax that'll help you out, $0.20 from tax from the interest savings, right? Is that...

[Jay C. Peterson:]

That is correct.

[Glenn Primack:]

And then there's probably another $0.20 or so if I just want to like -- in terms of get a cash-type number the tax effect of the amortization.

[Jay C. Peterson:]

Not $0.20. We've got about $4.4 million on the balance sheet for amortization. It might be a couple, $0.03, maybe. We'd probably be leaning into that number.

[Glenn Primack:]

Okay, all right. And so you're just -- you probably -- it's probably easier for you to budget annually, I guess, if you have your 3-year plan in place, versus quarterly at all, right? Just given big, lumpy projects, and whenever this chemical stuff kind of hits on the -- that we have all been hearing about and seeing some ammonia plants and this and that you might know what year, but you don't know what quarter. Is that safe to assume?

[Rodney Lynn Bingham:]

Yes. Because our backlog that we track is obviously mostly Greenfield projects. It rarely contains an MRO or small time projects as those tend to ship within week or a month. Those large Greenfield projects go up to 4 years. And the installation of the heat tracing, which, obviously is a culmination of the design of the heat tracing is dependent upon the constructability schedules of the mechanical contractors. So as that project chronology unfolds, there is some lumpiness in terms of quarter-to-quarter. And then, as we like to joke in terms of Q4 to Q5, it slips into another fiscal year. So when you're doing projects that are multiyear to develop and furnish, you have that sort of lumpiness that we just have to deal with.

[Operator:]

And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Rodney Bingham for closing remarks.

[Rodney Lynn Bingham:]

Okay, once again, thank you for those still on for your continued interest in Thermon. We're looking forward to another growth year coming up, and we've got a lot of exciting new possibilities in our future. And again, we look forward to servicing not only our customers, but also meeting expectation of our investors. So once again, thank you very much.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.